REC, PFC, IREDA shares fall up to 11% as RBI proposes tighter project finance rules

REC and PFC are the nodal agencies responsible for financing power sector projects overall. This means they are direct plays on the growing power demand.

Shares of REC Ltd., Power Finance Corporation Ltd. (PFC) and IREDA plunged as much as 11 percent on May 6 to give up most of their previous week's gains. PFC, REC stocks had hit record highs in the week gone by due to a stellar rally on the back of strong Q4 earnings.

The sharp fall comes after the Reserve Bank of India's draft guidelines on project financing, which mentioned that 5 percent general provision should be made on all existing and fresh project loans, which are in the "construction phase" (that is, before commercial operations commence).

These guidelines are proposed to be applicable to both banks as well as non-bank lenders. REC and PFC are the nodal agencies responsible for financing power sector projects overall.

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At 10:06 am, REC stock was trading 10 percent down at Rs 502.70 on the National Stock Exchange (NSE), marking its biggest single-day drop in eight months. The stock has also snapped a nine-day winning streak. A total of 2 crore shares changed hands so far in the day on BSE and NSE combined, equal to its 1-month average trading volume.

PFC stock tanked over 11 percent, marking its biggest single-day drop since 2020. The stock, trading at Rs 424.55 on NSE at 10:14 am, has snapped a four-day winning streak. So far on May 6, 3 crore PFC shares changed hands on bourses, higher that its 1-month average trading volume.

Shares of Indian Renewable Energy Dev Agency (IREDA) extended losses and fell up to 6 percent, marking their biggest single-day drop since December last 2023. The stock has plunged over 10 percent in the last five sessions.

Impact on power financiers

The draft guideline is applicable for all lenders but NBFCs follow IndAs accounting. Per existing rules, the difference in provision requirements between RBI rules and IndAs will have to be adjusted via impairment reserves (equity line item), noted CLSA.

"The overall impact on PFC and REC from higher standard asset will not be on their P&Ls but on capital adequacy ratios," the brokerage said, adding that PFC's and REC's latest Tier 1 stood at 23 percent, implying they are well capitalised. "New regulation by RBI will reduce risk of higher competition from banks," it added.

IIFL Securities said that when it comes to non-bank lenders like REC, PFC and IREDA, they expect no impact on their Return on Equity (RoE) but expect their tier-1 capital ratio to be hit by 200 basis points to 300 basis points and also potentially weigh on their valuation multiples.

Also Read | PFC, REC undervalued even after eye-popping rise over last year, say analysts

Analysts at JM Financial believe this is a significant increase in provisioning requirement and will result in lower returns for lenders in project finance and reduce incremental appetite for such exposures, if implemented in current form.

"While this is prudent from a risk management perspective, coming from the regulator’s experience in the last credit cycle, we believe this can be detrimental to growth in the capital-intensive infrastructure sectors in the economy," the brokerage said.

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